---
title: "CET1 Ratio"
url: "https://mahouse.world/glossary/cet1-ratio"
type: "glossary term"
author: "Ihor Vlasov"
reviewed: "2026-09-30"
published: "2026-09-25"
---

# CET1 Ratio

The CET1 ratio is a bank's common equity tier 1 capital — ordinary shares, share premium, retained earnings and reserves, less regulatory deductions such as goodwill — divided by its risk-weighted assets. It is the main measure of a bank's loss-absorbing strength: Basel III sets a 4.5% minimum, and buffers and supervisory add-ons lift the real requirement well above it.

**Also known as:** Common Equity Tier 1 ratio, CET1 capital ratio, Tier 1 common capital ratio

## Key facts

- **Formula:** CET1 capital ÷ risk-weighted assets (RWAs); CET1 is common shares, share premium, retained earnings and other reserves, after deductions that include goodwill and other intangible assets
- **Minimums (Basel III):** CET1 of 4.5% of RWAs, Tier 1 of 6% and total capital of 8%, plus a 2.5% capital conservation buffer; authorities can add a countercyclical buffer of up to 2.5% in CET1, and global systemically important banks carry surcharges of 1% to 3.5%
- **In practice:** supervisors add Pillar 2 requirements and guidance; for banks directly supervised by the ECB, overall CET1 requirements and guidance average 11.2% for 2026, against an aggregate CET1 ratio of 16.1% in the third quarter of 2025
- **Breach:** a bank inside its combined buffer may pay dividends, AT1 coupons and bonuses only up to a maximum distributable amount; below the minimum, supervisors intervene
- **Who sets it:** the Basel Committee writes the standard; the PRA, the ECB and national authorities in Europe, and the US banking agencies, apply it

## How the CET1 ratio works in practice

A bank manages the ratio from both ends. The numerator grows with retained profit and new shares and shrinks with losses, dividends, buy-backs and deductions; the denominator grows with lending and with riskier assets, which carry heavier weights. A bank at 14% against a 10.5% requirement has 3.5 points of headroom, and management targets a margin above the requirement because investors, rating agencies and supervisors all watch it.

Capital decisions are therefore expressed in CET1 basis points. A new lending book, a securitisation that transfers risk, a dividend or a buy-back is judged by its effect on the ratio, and bank results are read for the change in CET1 as closely as for earnings.

In an acquisition the ratio is often the binding constraint. The buyer consolidates the target's risk-weighted assets and deducts the goodwill it creates, so a purchase above tangible book value consumes capital as well as cash. Bank deal announcements commonly quantify the CET1 impact, and a deal that would take the buyer below its target may need a share issue alongside it.

For a fintech with a banking licence, the same arithmetic caps growth: every pound of new lending needs CET1 behind it, and until the bank is profitable that capital comes from investors. A buyer of a digital bank reads its ratio, its requirement and its lending plan together to see when the next raise falls due.

## Example

A digital bank has €8bn of risk-weighted assets and €1.1bn of CET1 capital, a ratio of 13.75%, against a requirement including buffers of 10.5% and a board target of 12.5%. It agrees to buy a consumer lender for €300m in cash; the lender has €180m of tangible equity and €1.2bn of RWAs. On consolidation the lender's equity is eliminated, its RWAs are added, and the €120m of goodwill is deducted from CET1. The combined bank has €980m of CET1 against €9.2bn of RWAs — 10.65%, just above its requirement and well under target. Returning to 12.5% needs about €170m of new CET1, so the bank pairs the deal with a share placing, and the acquisition case has to earn a return on €470m of capital, not €300m.

## Common mistakes

- Adding the target's equity to the buyer's CET1; on consolidation it is replaced by goodwill, which is deducted.
- Treating the 4.5% minimum as the requirement; buffers and Pillar 2 add several points.
- Comparing banks' ratios without checking whether each is transitional or fully loaded.
- Relying on internal models to shrink RWAs; the Basel III output floor keeps them at no less than 72.5% of the standardised figure.
- Planning dividends or buy-backs without the headroom to stay above the combined buffer.
- Counting AT1 or Tier 2 instruments as CET1.

## Related terms

- [Regulatory Capital](https://mahouse.world/glossary/regulatory-capital.md)
- [Leverage Ratio](https://mahouse.world/glossary/leverage-ratio.md)
- [Bank Charter](https://mahouse.world/glossary/bank-charter.md)
- [Tangible Book Value](https://mahouse.world/glossary/tangible-book-value.md)
- [Goodwill](https://mahouse.world/glossary/goodwill.md)
- [Synthetic Securitisation](https://mahouse.world/glossary/synthetic-securitisation.md)

— Ihor Vlasov, M&A FinTech Expert. Last reviewed 2026-09-30. https://mahouse.world/authors/ihor-vlasov